Tuesday, June 6, 2017

Not stars as in sports stars either, that was Fantex from a few years ago.
This is stars as in, well here's Wealth Manager's CityWire Passive Beat:

Identifying star power before it becomes self-evident is no easier in
the investment business than in show business. Those tasked with
finding tomorrow’s stars therefore have to rely on proxies, whether a
dazzling smile or a killer app.

In both worlds, it’s important to distinguish genuine stars from
those who merely possess some quality, which is far more readily
apparent and so less valuable. The equivalent of a classically trained
actor, for instance, could be a stock that qualifies for a quality index
thanks to ‘strong and stable’ earnings.

FANG-tastic
But that, like theatre experience, implies reliability rather than
true stardom. The MSCI World Sector Neutral Quality index contains
Microsoft but not Facebook, for example, and Apple but not Amazon.

A new paper – by David Dorn of the University of Zurich, Lawrence
Katz of Harvard University, and David Autor, Christina Patterson, and
John Van Reenen of the Massachusetts Institute of Technology – offers an
alternative way to define what they term ‘superstar’ companies. Their
research is primarily concerned with labour’s falling share of GDP,
which they argue can in part be attributed to these businesses.

‘We present a new “superstar firm” model of the labour share change,’
the academics explain. ‘The model is based on the idea that industries
are increasingly characterised by a “winner takes most” feature where a
small number of firms gain a very large share of the market.’

Although it is not the focus of the study, the prospect of owning
these superstars will be of interest to investors. As examples of such
firms, the authors cite obvious names including Google, Facebook, Apple,
and Amazon, but also stocks that may not be expected like Wal-Mart and
FedEx as well as unicorns such as Uber and Airbnb.

Shedding staff
What unites these firms? Autor et al point to a dominant market share
by sales in the company’s industry, a low employee-to-revenue ratio,
and a high patent intensity and total factor productivity. These metrics
could form the basis of an index methodology and thus an ETF.

Some of the themes propelling these superstars to pre-eminence in
their markets – the application of automation and artificial
intelligence, for example – have already proven popular with investors,
judging by flows into niche active and passive funds targeting these
areas.

Looking at the superstars’ high present valuations, some may prefer
to own their suppliers through artificial intelligence and automation
portfolios. After all, those trends appear secular whereas superstars
come and go.

Autor and co’s superstars may be different from the black holes of
the past, though, benefiting from more defensive characteristics.

Digging moats
‘Firms initially gain high market shares by legitimately competing on
the merits of their innovations or superior efficiency,’ the authors
contend. ‘Once they have gained a commanding position, however, they use
their market power to erect various barriers to entry to protect their
position. Nothing in our analysis rules out this mechanism.’...MORE